Image: Craig Sunter Flikr (cc)
If you’re only just settling down in front of your trading screens for the first time this week then you’ve timed yourself perfectly. In just a few hours, arguably the most important piece of the Australian economic puzzle see its second quarter figure released. That is of course, Australian CPI.
But before we delve into the release, yesterday’s price action was very important and needs a rundown. Price action that was all about the following headline out of Japan which first sent USD/JPY tumbling and then had a flow-on effect to the rest of the Forex market from there:
There is no 10 trillion yen stimulus https://t.co/bdOBchNPIH
— Livesquawk (@Livesquawk) July 26, 2016
The move was exaggerated by the USDX coming out of key resistance and the flow on effect of this move was the rocket underneath the Aussie Dollar that markets are buzzing about heading into CPI.
Taking a look at the USD/JPY hourly and I’ve left the daily MT4 period separators on the chart to better highlight the fall.
The break lower and subsequent pullback you can see were both very clean, technical moves. After which, there has been a lot of fear and uncertainty buzzing around the tradingsphere, with traders asking why so hard and across all markets?
There was the headline that gave price the kick, but it was however about as clean of a technical move as you’re going to get. Price coming out of higher time frame resistance, confirmed the move with a pullback (to perfectly re-activate the trend line just about to the pip), then dropped through the recent swing low support and pulled back to the first area of previous short term SR. Throw in the USDX at key resistance and this is what you get.
It sounds like hindsight, but the setup of shorting a lower time frame re-test, out of higher time frame resistance is the type of low risk, high reward setups that we talk about a lot on this blog.
The daily still shows plenty of white space between channel resistance and support… Hello BoJ, are you there?
Now, back onto the big ticket item of the day and the Australian CPI data release! Spurred on by what happened following the first quarter CPI release, markets are expecting the Reserve Bank of Australia to slash interest rates by 0.25% if the inflation print undershoots expectations.
Interest rate futures are currently pricing in around a 65% chance that the RBA makes their move, and all but one surveyed economist is expecting a move to the downside from the bank.
So with an AUD market on the edge just waiting for the signal from the RBA, could this USD weakness inspired rally in AUD/USD be an opportunity to short into?
Could yesterday’s move highlight an opportunity for the market to have to re-price from the AUD side, if things don’t quite go to plan?
Conversely, remember in the midst of the May 2016 doom and gloom, on the higher time frame charts AUD/USD sat at key weekly support. We were heading into a period of uncertainty around China, Brexit and whether the Federal Reserve would resume interest rate hikes. All that the Aussie needed was a weak set of data releases and it was goodbye to the pair.
But the Australian economy is a resilient little bugger (‘straya!), and anyone playing the contrarian at key technical levels continues to cash in nicely. These levels still hold true today and a resumption of the bigger picture bullish trend is still just a single, highly important data release away!
Make your call and manage your risk accordingly.
On the Calendar Wednesday:
AUD CPI q/q
GBP Prelim GDP q/q
USD Core Durable Goods Orders m/m
USD Crude Oil Inventories
USD FOMC Statement
USD Federal Funds Rate
Dane Williams – @VantageFX
We’ve been having some trouble with charts loading on the Vantage FX website today, so if they aren’t working for you then make sure to check out the same post over on Dane Williams FX.
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